A lease is not a cheaper way to buy a car. It is a fixed-term rental in which you pay for the value the car loses while you have it, plus interest on the money the leasing company has tied up in it. Everything else about leasing follows from that one sentence.
Here is what the contract actually says, how the monthly payment is arrived at, what happens at the end, how the arithmetic compares with buying, and what changed for 2026.
What leasing actually is
You sign a contract with a dealer or a finance company to use a specific vehicle for a fixed term, normally 24 to 48 months, with a mileage allowance and a standard of condition you agree to return it in. The leasing company owns the car throughout. You build no equity, and at the end you return it, buy it at the price written into the contract, or start again.
The monthly payment covers two things: the depreciation you are responsible for, and a finance charge on the company's money. That is why a car that holds its value well can lease for less than a cheaper car that does not - the payment tracks the loss, not the price.
The terms that decide the price
Seven items in the contract determine what you pay. It is worth asking for all of them in writing before signing anything:
- Capitalized cost. The agreed price of the car for lease purposes. It is negotiable exactly like a purchase price, and negotiating it is the single most effective thing you can do.
- Residual value. What the car is deemed to be worth at the end of the term, set by the leasing company and normally fixed. A higher residual means a lower payment and a higher buyout price.
- Money factor. The interest rate, written as a small decimal. Multiply it by 2,400 to read it as an annual rate: 0.00250 is 6 per cent. It is often marked up by the dealer, and it is negotiable.
- Term. Usually 24 to 48 months. Matching the term to the length of the factory warranty keeps repairs out of your hands.
- Mileage allowance. Typically 10,000 to 15,000 miles a year, with an excess charge usually between $0.15 and $0.30 a mile. Buying extra miles at the start is almost always cheaper than paying for them at the end.
- Disposition fee. A charge for handing the car back, commonly around $350 to $500, and often waived if you lease again from the same company.
- Cap cost reduction. The money down. It lowers the payment but is not a deposit: if the car is written off early, that money is generally gone, which is the main argument for putting little or nothing down.
How the monthly payment is worked out
There is no mystery to it. The payment before tax is the sum of two figures:
- The depreciation charge. Capitalized cost minus residual value, divided by the number of months. This is the larger part of most payments.
- The finance charge. Capitalized cost plus residual value, multiplied by the money factor. Note that it uses the sum of the two, not the difference - that catches people out.
- Tax. In most US states, sales tax applies to the monthly payment rather than to the whole value of the car, which is one of the real advantages of leasing.
- Anything you add. Service plans, wear protection and similar products are rolled into the payment, so they are easy to miss and worth pricing separately.
A worked example: a car with a capitalized cost of $35,000, a residual of $21,000 over 36 months and a money factor of 0.00250. Depreciation is ($35,000 - $21,000) ÷ 36 = $388.89. The finance charge is ($35,000 + $21,000) × 0.00250 = $140.00. The payment before tax is $528.89. If a dealer's quote is far above the figure this arithmetic produces, the difference is in the cap cost, the money factor or something added to the deal.
What it takes to qualify
Leasing approval is usually stricter than a loan, because the company is trusting you with its own asset and expecting it back in a particular condition:
- Credit. Most leasing arms look for roughly 680 or better, and premium brands' promotional offers often assume 700 and above. A lower score does not necessarily mean refusal, but it means a higher money factor or a co-signer.
- Provable income. Recent pay slips, or tax returns if you are self-employed.
- Debt-to-income ratio. Broadly under 40 per cent of gross income including the new payment.
- Insurance. Full coverage is mandatory, and leases usually require higher liability limits than a state's minimum, which adds to the running cost.
- Money at signing. First payment, taxes, registration and an acquisition fee, even on an advertised zero-down deal - the advertised figure and the amount due at signing are rarely the same number.
What happens at the end
The leasing company will normally arrange an inspection 30 to 60 days before the return date, which is deliberate: it gives you time to fix cheap things yourself rather than pay their rates. Then you choose:
- Return it. Pay for excess mileage, any damage beyond normal wear and the disposition fee, and walk away. Compare a body shop's price for a scuffed bumper against the leasing company's charge before you hand the car over.
- Buy it. If the car is worth more than the residual written into the contract, buying it is the whole of that difference in your favour. This happens more often than the industry likes to advertise, so check the market value before deciding.
- Lease again. Often the disposition fee is waived and loyalty incentives appear, which is the outcome the dealer would prefer.
- Extend. Some companies allow a short extension while you decide. It is usually the most expensive option per month and carries no promotional support.
Leasing against buying
The comparison is not really about the monthly payment, which is always lower on a lease; it is about what you own at the end:
| Factor | Leasing | Buying |
| Ownership | None - the car goes back | Yours outright once the loan is paid |
| Monthly payment | Lower; covers depreciation and interest | Higher; covers the whole price plus interest |
| Cost at signing | Often lower, sometimes near zero | Down payment plus tax on the full price |
| Mileage | Capped, with a charge per excess mile | No limit |
| Repairs | Usually inside the factory warranty | Yours once the warranty ends |
| Changing cars | Every two to four years, easily | Requires selling or trading in |
| Equity | None | Builds, and is yours when you sell |
| Modifications | Not permitted | Your choice |
| Total cost over ten years | Higher - you never stop paying | Lower once the loan is finished |
Who leasing actually suits
Leasing is a good answer to some situations and a poor one to others. It tends to fit if:
- You want a new car every few years anyway. Leasing removes the selling and the trade-in negotiation from that cycle.
- Your mileage is predictable and moderate. Under the allowance, the arithmetic works; well over it, the excess charge undoes the saving.
- You need the payment to be low and certain. Repairs stay under warranty and the payment does not move.
- The car is for a business. Lease payments may be deductible where a purchase is depreciated instead, which is a question for an accountant in your jurisdiction rather than a dealer.
- You are in the country for a fixed period. A lease ends cleanly, where ownership means selling a car in a market you are about to leave.
What changed for 2026
Two things have shifted recently that change the advice:
- The federal EV lease subsidy has gone. The commercial clean vehicle credit that funded the so-called leasing loophole ended for vehicles acquired after 30 September 2025 under Public Law 119-21, along with the purchase credit. Electric car lease offers still exist, but they are now paid for by manufacturers rather than by the taxpayer, so compare them on their own numbers.
- Lease equity is harder to realise. Many captive lenders restrict or refuse third-party buyouts, so a dealer other than the one that leased you the car may not be able to buy it. If your car is worth more than its residual, check your own contract for who is allowed to purchase it.
- Residual values are being set more cautiously. After several volatile years in used prices, lower residuals mean higher lease payments on the same car - which is why running the arithmetic above on any offer matters more than it did.
The bottom line
Lease if you value a low, predictable payment and a new car every few years, and if your mileage genuinely fits the allowance. Buy if you keep cars a long time, because the cheapest years of ownership are the ones after the loan ends, and a lease never reaches them.
Whichever you choose, ask for the capitalized cost, the residual, the money factor and the fees in writing, do the two-line calculation yourself, and check the market value of the car before you decide whether to hand it back or buy it.
